All posts in category Portugal

For most of this year, hopes that the euro-zone debt crisis will be resolved and suggestions that a global recession will be avoided have helped to lift market sentiment and push the U.S. currency lower.

Not only has the dollar fallen against other major currencies, such as the euro and the yen, but its index has fallen from a high of over 81.5 in early January to under 78.5 now.

This dollar decline, however, should all start to change.

At the moment, Greek negotiations for its second bailout are dominating market sentiment as the talks lurch from one crisis to the next.

However, any euphoria over a settlement that allows the country to get the next tranche of funds from the European Union, the International Monetary Fund and the European Central Bank and avoid any immediate default will be short-lived.

Euro-zone finance ministers have sent Greece back “to do its homework” before it can clinch fresh multi-billion euro aid to avoid default on its debt next month.

Weeks of political drama and bargaining with international lenders in Athens didn’t help ease mistrust and anger among European governments toward the Greek political leadership, with many of them demanding more proof that the country will fulfill its past and present pledges.

Greece must push through the reforms package for a parliamentary vote, possibly Sunday.

Once the measures are finalized, the Troika judges if the deal is satisfactory and puts together a report recommending whether Greece is eligible for a second bailout loan. At the same time the IMF is expected to prepare a new debt sustainability analysis on Greece’s debt. The original bailout plan targets reducing Greece’s debt to 120% of GDP by 2020.

The Greek parliament also soon needs to adopt at some time legislation to retrofit bonds with collective action clauses, a provision that would bind a minority of holders to the decisions of the majority.

Germany’s lower house and some other European parliaments, such as Finland’s, must approve their countries’ contribution to the Greek bailout before funds can be disbursed.

Euro-zone finance ministers meet to grant approval to the final bailout package. A meeting to discuss the deal has been set for Wednesday.

Greece launches the bond exchange offer to private-sector creditors. Under the original timetable, the bond exchange offer, which will run for three weeks, was due to start on Feb. 13, a deadline Greece has now missed. It will need to stick as closely as possible to this date to complete the PSI by early March to mid March. After that, bailout loans will be disbursed.

On March 20, Greek bonds of €14.4 billion mature. Greece has a seven-day grace period to make the payment.

The ECB will make a decision on whether to participate in the debt restructuring by foregoing profits on its own bonds once all other elements of the package, including a debt sustainability analysis by the IMF, are in place.

Greece’s political leaders agreed unpopular budget, wage and pensions cuts that moved Europe to the verge of approving a new bailout to stave off a messy Greek debt default, but euro-zone finance ministers demanded the measures pass the Greek parliament before they would finally to sign off on the deal.

The demands from the finance ministers set the stage for a further week of uncertainty over the long-awaited bailout and debt-restructuring package for Greece. The focus will shift to the Greek parliament on Sunday where the euro zone is insisting the program is agreed. “In short, no disbursement [of aid] without implementation,” said Jean-Claude Juncker, the Luxembourg prime minister who chairs the ministers’ meeting.

Greek Prime Minister Lucas Papademos said Thursday that a pending dispute among political leaders supporting his government over pension cuts was resolved paving the way for Greece to receive a €130 billion bailout ahead of a mammoth debt repayment next months. European economic and monetary affairs commissioner Olli Rehn confirmed that the EU had received a staff agreement between Greece and a troika of officials from the country’s international lenders.

The demands underline the erosion of trust between Greece and its creditors in the euro zone. A further meeting of euro-zone ministers is scheduled for Wednesday to finally sign off on the agreement, assuming the package passes parliament.

Against this backdrop, the European Central Bank held its regular rate-setting meeting. Its president, Mario Draghi, confirmed that the Greek prime minister told him by phone that a deal between political leaders had been struck.

He indicated that the ECB appears willing to help Greece reduce its debt load but ruled out taking any losses, saying it violated the ECB’s rules. But Mr. Draghi left the door open of some kind of bond transfer to the European rescue fund whereby the ECB gives up future profits but doesn’t take a loss. On the economy, Mr. Draghi was cautiously upbeat.

Earlier, the central bank announced that it would keep its core interest rates on hold.

Meanwhile, the Bank of England announced that it is injecting another £50 billion ($79 billion) into the British economy, which contracted in the last three months of 2011. It also said interest rates would remain unchanged at a record low of 0.5%.

Against this backdrop, the European Central Bank is holding its regular rate-setting meeting and is widely expected to keep its interest rates on hold.

But market participants will be closely watching ECB President Mario Draghi’s statement for any clues as to how the central bank will deal with the intensifying crisis in Greece.

The Bank of England is also hold its monthly rate-setting meeting. Analysts expect it to increase its quantitative easing program by between £50 and £75 billion.

5:54 am (EST)

Welcome

WSJ Staff

Welcome on what promises to be another busy day for Europe.

Faced with a tight deadline on March 20, when a €14.4-billion bond comes due, Greece and its international creditors are fast running out of time to wrap up a deal with European and International Monetary Fund officials.

This also includes a €100 billion debt write-down plan with the creditors. Approval of the bailout package will pave the way for a bond-swap offer to the private sector, which Greece is hoping to complete by early March.

Pressure on Greece has been piling up from its euro-zone partners to accept the new round of painful austerity in exchange for the aid promised to the country last October.

The international lenders have asked Greece to come up with €3.2 billion in spending cuts for 2012 alone. They also sought the mass layoff of some 15,000 civil servants in Greece's bloated public sector in 2012, as well as steep cuts in supplemental pensions paid to retirees.

Speaking after a five-hour meeting with a delegation of European and International Monetary Fund officials, a visibly tired Evangelos Venizelos (pictured), Greece's finance minister, signaled that he expected euro-zone finance ministers to bridge differences over the loan program at a meeting scheduled for later in the day.

"I leave in a short while for Brussels with the hope that the euro group meeting will convene and that it will take a positive decision for the new program," he said. "There remain issues that need to be clarified by the time of the euro group meeting."

The euro-zone economy may have stabilized in January, but spendthrift consumers could well hamper any long-lasting recovery.

The composite purchasing managers’ index Friday showed business activity edging up at the start of 2012, confirming an earlier estimate. It’s an encouraging sign from a set of data that often reliably indicate trends in gross domestic product. It’s early days, but in the near term, it could mean the euro zone returns to growth in the first quarter, thereby avoiding recession even if there was a contraction in output in the fourth quarter.

But in other areas the signs aren’t good by any means. Consumer spending, an area the PMIs don’t touch on, was poor in December, a month usually boosted by Christmas spending. Retailers offered big discounts to drive up demand, but sales volumes fell nonetheless. That resulted in the first month-to-month drop in a December since the last recession.

Howard Archer, an economist with IHS Global Insight, said the weak sales figure “poses a serious threat to hopes that euro-zone economic activity can return to growth in the first quarter.”

Pedestrians pass a Portuguese national flag outside a building on Comercio Plaza in Lisbon, Portugal

The euro zone couldn’t find a better child that listens and follows rules than Portugal.

Since receiving a €78 billion bailout program last year, the government has been doing everything it was told to, including imposing a series of unpopular austerity measures such as sharp salary cuts in the public sector and tax rises.

As a result — and with the help of a one-off measure — Portugal was able to cut its budget deficit to about 4% of gross domestic product in 2011, from 9.8% in 2010. Prime Minister Pedro Passos Coelho has promised to meet 2012′s target of 4.5% too, saying he will do what it takes to achieve that.

Given how calm the Portuguese have been so far, that may be achievable through more cuts in the public sector and yet more and new taxes.

Portugal is also implementing structural reforms to make the economy more competitive. A few weeks ago, the government got unions and employers to agree on labor reforms the country has tried for decades.

Privatizations are also on track, with a big energy company, EDP, being sold to China late last year for a nice premium.

Yet, investors are increasingly believing Portugal will be the next Greece. They say austerity will be so deep that the economy will enter into a deeper-than-expected recession.

After building the image of a tight Franco-German alliance to fight the crisis, French President Nicolas Sarkozy may feel his German counterpart has over-stepped the (Deutsche) mark.

Angela Merkel’s support for his re-election provoked an awkward, cold response from Mr. Sarkozy, who is playing a delicate game of holding back his candidacy until the last moment.

“I did not know she voted in France,” the French President said in an interview with multiple television channels on Sunday evening.

Meanwhile, Mr. Sarkozy has been forced into another balancing act: cutting the growth forecast while avoiding the kind of austerity that many Europeans see as “brand-Merkel”. Many voters see the German leader as imposing painful, unwanted austerity across the euro zone.

In fact, the pact will probably inflict more damage on the single currency over time than the 25 leaders who signed up to it could possibly imagine.

First, there is the political fallout of passing such a heavy junk of fiscal sovereignty to Brussels.

Then, there are the terms of the pact itself, with a cap on budget deficits at 0.5% of GDP, strangling growth at just the time many of these euro-zone economies will need to expand.

But what is even more remarkable, and even more damaging, is how the pact is being sold.

Supporters say that its terms aren’t as rigid as they appear and that more flexibility can be employed in times of crisis. In other words, the pact is being watered down and circumvented even before the ink is dry.

Wasn’t a similar treatment of the Maastricht Treaty, that limited deficits to 3.0% of GDP, what got the euro zone into the current debt mess in the first place?

The EU has taken another step forward in its effort to prove to investors that the budgetary laxness that contributed to its current crisis won’t be repeated.

But it’s unlikely that investors will be so persuaded until they see the new fiscal compact agreed Monday in action, bearing in mind the disappointing implementation of previous budgetary rules.

So even if governments that now have difficulty borrowing are doing their utmost to cut their deficits and stick to the rules, it may be some time before they see the benefit in terms of lower borrowing costs.

Which is the problem that a group of European economists seek to address with a new proposal announced Tuesday. Acting under the umbrella of European League of Economic Cooperation — a pro-European business group that dates back to 1946 — they want euro-zone governments to pool their short-term borrowing for a period of four years after the compact comes into force early next year.

Their “Euro T-Bill Fund” would issue debt with a maximum maturity of two years under a joint and several guarantee, meaning that all governments would be equally responsible for repaying the debt.

A man walks by the closed doors of Brussels central station during a general strike all over Belgium which coincided with the summit.

Leaders of 25 European Union governments agreed Monday night on what some billed as a historic pact to move to closer fiscal union and signed off on the details of a permanent bailout fund for the euro zone—yet Greece’s looming debt restructuring threw a shadow over the summit.

The leaders discussed Greece but provided no further clarity on the eventual outcome of an issue that was creating increasing nervousness in financial markets Monday.

After Monday’s meeting, senior officials said they expected a debt-restructuring accord in “coming days,” in time to launch a bond-exchange offer to private investors by mid-February.

One question the summit didn’t address: whether official creditors, such as the ECB, will also be needed to reduce Greece’s debt to levels that it is likely to be able to sustain in the long term.

After the summit, Greek Prime Minister Lucas Papademos met with other senior European officials, including Jörg Asmussen, the German representative on the board of the ECB. Officials said the talks likely concerned conditions to be imposed on Greece so it can receive its new loans. But afterward, Luxembourg Prime Minister Jean-Claude Juncker, who attended the meeting, said it yielded no conclusions.

This blog has now closed.

6:33 am (EST)

Welcome

Jenny Paris and William Kemble-Diaz

European Union leaders will gather in Brussels today with the intention of finalizing accords to create a permanent bailout mechanism while also seeking to tackle slow growth and high unemployment.

But talks among the 27 EU leaders may be overshadowed by a looming deal between Greece and its creditors to halve its privately-held debt. Greece and its private-sector creditors are reported to be edging closer to an agreement over the €100 billion debt write-down with bondholders.

The deal must be agreed by the end of the month for Greece to make an offer for a bond exchange to its creditors by Feb. 13 and avoid default on a major bond redemption next month.

However, before then, Greek political leaders must provide written assurances to the country's senior official lenders that they will abide by tough reforms, regardless of who wins a pending election likely to be held in April.

It was only a question of time before the markets shifted their attention to Portugal.

For the past month or so, the European Central Bank’s half a trillion euro liquidity operation and expectations of a doubly big one next month has successfully distracted investors. But there’s the risk the ECB’s emergency action will prove little than smoke and mirrors against the harsh realities of the euro zone’s underlying problems.

The negotiations on Greece’s voluntary default could be dispersing some of the fog.

John Mauldin, a market pundit, recently outlined the crux of the euro zone’s problem, which I reinterpret below: